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Employing Young People

Employing Young People

Analysis By - Keith Rankin

There are two very different views about the labour market. Some people believe that there's no upper limit to the amount of jobs in an economy, and that unemployment is due to over-pricing in the labour market. These people believe that welfare payments act as a barrier to the reduction of wages, and that allowing wages to fall is what is required to make the labour market clear. In this view, employment is constrained by high wages.

The second view is that employment is constrained by the amount of spending. It is quite easy to show that the second view is the correct one. Further, it has been orthodox economics since the late 1930s. A corollary of this view is that the amount of available jobs for labour force entrants is functionally related to the rate in which people (mainly older people) leave the labour force.

The belief that there is no upper limit to jobs stems from the assumption that, if interest rates are zero, there will be an infinite demand for debt-enabled spending. This in turn stems from the long-held view that it is always possible to make an above-zero profit from investment spending.

Employment may be either self-employment, or working for a firm. In the case of consumers buying stuff from self-employed people we have a direct link from consumer spending to employment. Likewise, when firms or governments or foreigners buy stuff from self-employed people, we have a direct link from spending to employment.

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Employees are really no different from self-employed people. They sell labour services to businesses, much as a self-employed cleaner, journalist or electrician might. So when firms purchase labour services, someone is employed.

So the real question is, "under what circumstances do businesses buy goods and services, including labour services"? Under the first 'prices matter' view, the answer is when prices are low enough. Under the second 'spending matters' view, it is either when consumers, governments, foreigners or other businesses are spending, or when businesses anticipate an imminent increase in such spending.

A good way to think about this is to think about the extent that businesses buy the services of lawyers, a group who are essentially self-employed. Would a firm such as Whitcoulls buy more legal services if lawyers only charged $100 per hour? The answer of course is "it all depends". If Whitcoulls were facing a situation in which legal services were required, they might economise on their use of legal services if they had to pay $200 per hour. If the price of legal services then fell to $100 per hour, they would economise less, meaning they would buy more hours of legal services. More likely, however, Whitcoulls would have no need for legal services in addition to those they are already buying. So they would hire no more lawyers if lawyers' fees were reduced.

It's the same with unskilled labour services. One firm might hire a few more workers if they agreed to a wage cut; for example they might use more labour and less machinery. But, generally, firms will only hire more workers if their sales are increasing, or if they have a good reason to anticipate an increase in sales. If wages and salaries are cut by 20%, firms like Whitcoulls are unlikely to sell more books, even if they offer their books for sale at lower prices. Hence they would not employ additional workers.

If we want more people to be employed during a period in which consumers are spending less, foreigners are spending less, and businesses are spending less because they are either experiencing low sales or are paying down debt, then this can be achieved only if governments spend more. Governments clearly are not spending more, so we cannot reasonably expect increased employment. (We may get more part-time jobs, and more unsuccessful self-employed, but they do not represent a genuine increase in employment.) In a sense, in a contractionary environment, economies are like games of musical chairs. Every $50,000 or so of decreased spending represents the loss of a job, equivalent to the loss of a chair in that game.

So, if we are in an environment in which employment is constrained by a lack of spending, then the challenge is to consider the social costs of non-employment of different demographic cohorts. Is it more important for society that young people get into employment? Or that ageing people stay in employment?

Persons born after around 1965 have found their employment prospects constrained by the logjam of post-war baby boomers ahead of them. Those born in the late 1960s and the early 1970s (often dubbed "Generation X") had their employment prospects further compromised by the recessionary environment that prevailed in the late 1980s and early 1990s. Those born from around 1976 to 1987 ("Generation Y") were fortunate to enter the labour force in an expansionary period, in which spending was sufficient to create jobs for young people, especially "information technology" (IT) jobs which older persons were not well adapted to. Further, birth rates were low from 1976 to 1987, meaning that this age cohort had relatively little competition from their peers.

The generation in New Zealand that matters now, born from 1988 to the mid-1990s, has been dubbed the "baby-blip" generation. Thus, we now have a more numerous generation entering the labour force, during a contractionary global economic environment. Further, the "baby-boom" generation is only just starting to hit the traditional retirement age of 65. We have a logjam at the older end of the labour force, a global savings glut (another way of saying a lack of spending), and a larger number of labour-force new-entrants than we had half a decade ago.

In retirement, eg in the 2020s and 2030s, our elderly baby-boomers will desperately need the services of the baby-blip generation. Thus it is an utmost priority that we as a society smooth the journey of our 16-24 year-olds into employment. That means more baby-boomers should be retiring (partially if not fully) sooner rather than later.

Yet older people are surrounded by messages that age 65 is too young to retire. If a Labour-led government is elected in November, we even face the possibility that the age of qualification for New Zealand Superannuation will be raised, adding to the demographic logjam that is contributing to the problem of youth unemployment today. Indeed many Generation Xers, disadvantaged throughout their working lives, are already assuming that they will not qualify for a pension until they are aged maybe 70.

National are no better than Labour. They, with their program of welfare reform, are prioritising getting sole parents and disabled people into employment. This, in a low-spending environment, inevitably comes at the expense of young people. Indeed some sole parents and disabled people have advantages over new labour force entrants, because they have substantial work experience.

We should stop pretending that there would an unlimited number of jobs in a period of economic contraction, if only people would or could accept lower wages. And we should stop addressing issues of youth unemployment, welfare reform, and the age of retirement as if they are distinctly different issues.

We can afford to have older people earning less and spending more. Indeed this is exactly what must happen if the baby blip generation, upon which our retired baby boomers will profoundly defend, is not to fester at the tail end of the employment queue.


Keith Rankin teaches Economics in Unitec's Department of Accounting and Finance.

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